For the week ending 12th January 2018
U.S. markets are shut Monday for the Martin Luther King Jr. holiday after the S&P 500 Index closed on Friday at an all-time high. The euro remained near a three-year high on bets that central bank stimulus will be pared back further in Europe as its economy mends.
Improvements in the global economy are buoying sentiment in the early part of 2018 and equities are building on the stellar gains seen last year. Retail sales spurred optimism in the American economy and JPMorgan signaled the recent tax cut law will boost profits. An acceleration in US core inflation offered another sign that the recovery is gathering pace nine years after the global recession.
US stocks shot higher in early trading Friday, following the release of data showing that retail sales had risen by a solid 0.4% in December. The gains were especially welcome coming on the back of a 0.9% gain in November. Shares of Amazon.com and traditional retailers Home Depot, Best Buy, Costco, and Walmart rose on the data. Friday also brought the release of the first major fourth-quarter earnings reports. Investors welcomed a positive outlook from JPMorgan Chase, while Wells Fargo fell on news that it had set aside $3.25 billion in reserves to cover legal expenses related to its mortgage practices leading up the housing collapse and 2008 financial crisis.
China played a surprisingly large role in U.S. investor sentiment early in the week. Stock futures fell sharply before the start of trading on Wednesday on reports that China was considering slowing or even halting its purchases of Treasuries. The news pushed the yield on the 10-year Treasury note to 2.60%, its highest level in 10 months, and led to fears of a disruption in global financial markets. (Bond prices and yields move in opposite directions.) Stocks quickly regained their footing, however, and Chinese officials later denied any changes to their policy.
Observers also noted that China has not been an important buyer of Treasuries in recent years. Investors were also briefly unnerved Wednesday by an article published by Reuters that stated that Canadian officials are increasingly convinced that President Trump will soon announce a U.S. withdrawal from the North American Free Trade Agreement (NAFTA). The White House denied the report, however.
As earnings season began, European equities ended the week higher amid generally positive economic and geopolitical news. Early in the week, the Europe STOXX 600 Index touched its highest point since August 2015 with the automobiles, commodities, and financials sectors all rising. The FTSE 100 Index of UK blue chip stocks notched three successive record-breaking days as the pound’s weakness and stronger-than-expected manufacturing and industrial output reports boosted stocks.
Germany’s blue chip index, the DAX 30, ended the week higher on positive economic news. Sentiment received a further boost from a preliminary agreement between Chancellor Angela Merkel’s conservative bloc and the Social Democratic Party on a coalition blueprint, which helped ease months of political uncertainty in Europe’s largest economy.
Eurozone government bonds in most countries sold off on concerns that the European Central Bank (ECB) could be preparing to withdraw its monetary stimulus by the end of the year. (In the latter part of 2017, the ECB announced plans to extend its bond-buying program until at least September 2018. However, starting this month, the ECB is cutting its monthly asset purchases in half.) The selling accelerated late in the week following the publication of the minutes from the ECB’s December meeting, which highlighted positive signs on eurozone economic growth.
The yield on 10-year German government debt had risen to around 0.58% by Friday, up about 14 basis points for the week. Swiss government bonds also sold off, broadly tracking eurozone bond yields higher. The yield on 10-year Swiss debt reached positive territory for the first time since October.
Growth data from China this week will be closely watched, along with talks to form a coalition government in Germany, following signs of progress last week. Money managers will assess progress in corporate America this week with further earnings releases, while results are due across the world from firms in a range of sectors.
The Week ahead:
- Industrial production in the U.S. probably increased in December, a report may show Wednesday, completing a solid year for manufacturing. U.S. housing starts probably slipped in December for the first time in three months as frigid winter weather impeded work, forecasts show ahead of Thursday’s release.
- The Bank of Canada’s interest-rate decision comes Wednesday. Monetary policy announcements are also due in South Korea, South Africa and Turkey.
- China releases fourth quarter GDP, December industrial production and retail sales Thursday.
All the best & have a good week
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